Guo Shuqing, chairman of the China Banking Regulatory Commission, said in early March that the current financialization and bubbling of China’s real estate is dangerous and is the biggest “gray rhinoceros” in the financial system. This is Guo Shuqing’s second serious warning in three months, which shows that China’s real estate financial bubble has become quite serious.
Guo Shuqing in China’s State Council “to promote the high-quality development of the banking and insurance industry” press conference pointed out that “‘gray rhinoceros’ problem, is that many people buy houses not to live, but for investment or speculation, which is very dangerous.” “Holding so many properties, if this market comes down in the future, there will be a great loss of personal property, the loan can not be repaid, the bank can not collect the loan, the principal and interest, the economic Life of a great disruption.”
The so-called “gray rhinoceros” crisis, as a huge impact, is likely to occur, but the serious threat of neglect, as if a giant gray rhinoceros is running wild, when the discovery of the tragedy has already escaped being rammed.
Second serious warning in three months
China’s economy has been hit hard by the Wuhan pneumonia Epidemic in 2020, and the Chinese Communist Party authorities have continued to tighten financing conditions in a bid to clamp down on the real estate bubble, putting real estate companies under heavy pressure.
According to China’s Daily Economic News, the total market value of China’s 50 listed real estate companies shrank by RMB 800 billion last year compared to 2019. According to the announcement of the People’s Court of China, there were more than 470 bankrupt real estate enterprises last year, and even though the news of rising house price speculation in primary and secondary cities is still noisy, the industry is actually wailing all over the place, especially the small and medium-sized real estate enterprises.
Under the pressure of reality, Chinese real estate companies are pushing fewer cases, but the pressure of depletion of existing housing volume is still high, and they continue to “issue new debts and pay off old ones” at Home and abroad in order to survive. In the first three quarters of last year, Chinese real estate companies issued a record number of bonds at home and abroad, with a total of 307 issues, raising RMB 324.7 billion, an annual increase of 14%, which seems to indicate that many real estate companies want to accelerate financing before the policy changes.
According to CreditSights, a bond research firm, Chinese real estate companies’ offshore debt soared this year to $53.5 billion, more than double last year’s $25.4 billion, notably the majority of which were U.S. dollar-denominated bonds, amounting to $47.6 billion.
Also importantly, in an attempt to avoid a series of “mines” by real estate companies, China’s central bank and the Ministry of Housing and Urban-rural Development drew a red line, setting out new rules in August last year on the “three red lines” of real estate financing, with violators banned from lending in an attempt to tighten the ability of real estate companies to raise capital. As a result, the support of state-owned banks for real estate enterprises plummeted, and real estate enterprises were threatened with a broken capital chain.
The so-called “three red lines” refers to the fact that the gearing ratio of real estate enterprises, excluding pre-receipts, needs to be greater than 70%, the net debt ratio is greater than 100%, and short-term borrowing must not exceed cash reserves. Under the “three red lines”, the long-standing “high leverage and high debt” and even “borrowing to pay off debts” mode of operation of Chinese real estate enterprises has become difficult to maintain.
Last December, Guo Shuqing, who is also the Party Secretary of the Central Bank of China, published an article on “Improving the Modern Financial Supervision System”, emphasizing that real estate has become the biggest “gray rhinoceros” in China’s financial risk, and that China’s real estate is showing signs of a bubble, with 39% of China’s banking sector loans being real estate-related. The real estate industry in China is showing signs of a bubble, with 39% of China’s banking sector loans being real estate-related loans and a large amount of bonds, equity, trusts and other funds flowing into the real estate industry.
Guo Shuqing pointed out that of the more than 130 financial crises that have occurred in the world over the last century, as many as 100 have been related to real estate, with real estate mortgages exceeding 32% of U.S. GDP in 2008, for example, before the U.S. subprime mortgage crisis. In contrast, 39% of the current Chinese banking sector loans belong to real estate-related loans, and there are a lot of other funds flowing into the real estate industry, it can be said that the biggest gray rhino of financial risk in China today is real estate.
The grey rhino is getting stronger and stronger
Chinese financial research institutes point out that as early as 2018 China’s real estate market value has reached 356% of GDP, much higher than the 126% of the United States and 208% of Japan. And from 2010 to the end of 2020, China’s real estate mortgage-to-GDP ratio (real estate leverage) surged from 15.9% to 40.1%, already well above the pre-subprime crisis level in the U.S. (32%).
In addition, at the 2019 Boao Real Estate Forum, Shao Yu, chief economist at China Eastern Securities, pointed out that China’s total real estate market capitalization reached $65 trillion, about five times its GDP, compared to Japan’s housing bubble, which accounted for only 215% of its GDP at its peak, making China’s total real estate market capitalization arguably the largest bubble in history.
The Wall Street Journal also reported recently that Chinese real estate companies are facing a large amount of international debt to be refinanced this year, but are facing strict loan conditions, making the risk of debt default surge. The Wall Street Journal pointed out that Chinese regulators have imposed “three red lines” on banks’ real estate lending, making it difficult for real estate companies to follow the usual practice of getting lending support from state-owned banks.
China Evergrande Group (ranked as the largest real estate developer in China and the largest junk bond issuer in Asia), which is described as “too big to fail”, has a total debt of nearly US$3 billion due this year, and the outstanding USD bond yield is between 13% and 17%, which will not only trigger a systemic financial crisis in China, but also affect the international financial industry. The crisis not only threatens to trigger a systemic financial storm in China, but will also spread to international finance, which is of great concern to the global industry. According to Owen Gallimore, head of credit strategy at ANZ, it is difficult to obtain bank financing when the yield rate exceeds 15 percent.
If China’s real estate collapses, the Chinese Communist Party will not be protected. The Chinese Communist Party authorities see China’s real estate gray rhinoceros getting stronger and stronger, but fear that because of shaking the huge interests of the Communist Party, they are unable to completely solve the problem, but also make the Communist Party in a dilemma, deep in a vicious circle.
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